The Bioscience Crowdfunding Environment: The Bigger Better VC?

The Bioscience Crowdfunding Environment: Will Crowdfunding be the Bigger, New VC

Reporter: Stephen J. Williams, Ph.D.

Pharmaceutical Consulting Consortium International Inc. (PCCI) recently presented their 7th annual Roundtable “CROWDFUNDING FOR LIFE SCIENCES: A BRIDGE OVER TROUBLED WATERS?”, a panel discussion on how this new funding mechanism applies to early stage life science companies and changes the funding landscape.

A major provision in the recently passed JOBS Act resulted in Securities & Exchange Commission (SEC) rule changes revolutionizing the way companies can raise capital, with some figures in the range of $11 trillion dollars. Companies, startups, and entrepreneurs can, in a manner, now go directly to the individual investor and raise capital. This method is generally referred to as CROWDFUNDING.

As explained by Mark Roderick, moderator for the meeting, there are two main types of approved crowdfunding:

Donation-based Crowdfunding – Popularized by the crowdfunding platform Kickstarter, this method of raising capital can accept small donations from anyone for an idea/project to be completed. The donor may either get a free token of appreciation or access to enjoy the fruits of the project, for example, a watching a movie funded by the donor. Some scientific researchers have used Kickstarter as a method to fund their research.

Investor-based Crowdfunding– This type of crowdfunding involves the actual transfer of securities, and investors must qualify according to rules set by the SEC and go thru brokers, or portals, like the bioscience and healthcare internet portal Poliwogg.

Investor-based crowdfundingwas discussed at the meeting. There are five different mechanisms with this type of funding: Title II (Rule 506c), Title II, Title IV, Existing Regulation A, and Rule 504. The main focus of the meeting was on Title II as, according to Mr. Roderick, involves the mechanism most suited for biotech startups, while rules for Title III still need to be finalized.

Title II crowdfunding requires that “accredited” or “qualified” investors (those who make at least $200,000/year or net worth $1 million US) go through licensed dealer internet nodes (or Portals) like Poliwog. The Portal will have lists of startups they deem legitimate which investors can choose from. For instance the Epilepsy Foundation uses Poliwog to fund certain projects.

The panelists discussed matters including:

How crowdfunding is different than other mechanisms like venture capital

What are the regulations and financial responsibilities for both biotech and crowdfunder

Liabilities

Due-diligence issues

The panelists included:

Mark Roderick, moderator. Mark is an attorney at Flaster/Greenberg PC (@CrowdfundAttny on Twitter) and has developed great experience and expertise in the details of crowdfunding. He maintains a Crowdfunding blog www.crowdfundattny.com, which contains information and links about the JOBS Act and crowdfunding.

The Opportunity

Recent estimates place Title II Crowdfunding capacity to $1 Trillion.

Where does the rest go?

Mr. Skerret noted that bioangels can only take you so far but thinks that crowdfunding may fill this “valley of death”.

Liabilities

Crowdfunding is SELLING SECURITIESso there is liability, disclosure and nondisclosure issues.

Title II contains 580 pages of regulations and SEC needs a licensed intermediary.

Due-Diligence

Barbara Schiberg also noted that with VCs or bioangels groups you also get s support network, basically their rolodex of contacts and KOL’s and experts. With Crowdfunding like Poliwog they just handle linking investors with entrepreneur. Any contact is done through social media and the crowd.

BioAdvance hires experts – may take months to years to get expert opinion

Poliwog only has responsibility to investor to make sure company is legitimate. They don’t do extensive due diligence like bioangels. Most crowdfunding do not have extensive networks of professionals.

3 Responses

I’m not sure whether this is a skewed graphic of the whole picture. The crowdfunding is for startups, but there has to be a large investment in the research enterprise before you get there. The citation of the Technion-Cornell is interesting because the entire Institute is funded by the Founder of the San Diego based electronics giant and his wife. He was former Chairman of Engineering at UCSD, Israeli-born, and a graduate of Cornell. Also, very large funding comes from some of the 15 wealthiest americans, entrepreneurs among them, as Broad, Gates, Whitehead, and even… KOCH (UCLA and MIT).
The situation for support has been in transformation for probably longer than a decade. We have stumbled more than once on a federal budget that has required borrowing for “guns and butter”, with a national image of the leader of the worlds nations, and mis-“shaper” of world events. We don’t have that imagined level of control, which may be referred back to post WWII hegemeny, a piece of which Putin wants back..

Actually the graphic is more skewed than I represent. The Crowdfunding sphere is estimated at up to $11 Trillion dollars and with VC only funding about 2-3% of startups presented to them, this type of funding mechanism will probably replace Wall Street Venture funds. However that being said the whole funding universe is of course much bigger with Angels, Bond market, IPO, and hedge. the graphic is just a comparison of how crowdfunding like Kickstarter compares to VC’s 2013 contribution.